Dollar slips vs. pound after BOE cuts rates

Downbeat U.S. economic data also weigh on greenback

By

LisaTwaronite

NickGodt

WilliamL. Watts

SAN FRANCISCO (MarketWatch) - Downbeat U.S. data pushed down the dollar against its major rivals Thursday, while the British pound rose in the wake of the Bank of England's widely expected interest rate cut.

The BOE's Monetary Policy Committee cut interest rates by 50 basis points to 1.5%, an all-time low for the benchmark since the BOE's founding in 1694. Last month, it slashed the key rate a full percentage point to 2%. See full story on BOE's latest move.

Some strategists said the pound's sharp plunge at the end of last year, which temporarily drove sterling to the verge of parity with the euro, likely restrained policy makers somewhat.

In the statement, the central bank twice described sterling's fall as "substantial."

Moreover, the size of Thursday's rate move and the tone of the statement dampened expectations the Bank of England would quickly emulate the Federal Reserve's move toward zero rates in the U.S., observers said.

The BOE "claimed that the pound's significant drop and falling inflation will provide stimulus to the economy," wrote John Rivera, currency analyst at DailyFX. "The comments were somewhat hawkish and left doubts of further easing, which sent the pound up."

But analysts were far from unanimous as to the outlook for future rate reductions.

Obama also spoke about unemployment in urging Congress to get to work on a package of new spending and tax cuts, saying the costly plan is need to head off dire consequences for the country. See detailed report.

The dollar was further pressured by a report showing U.S. jobless claims fell in the latest week.

Initial claims for unemployment benefits declined 24,000 to 467,000 in the week ended Jan. 3. Continuing jobless claims, an indication of the difficulty in finding a new job, rose to the highest since November 1982.

Some analysts noted the numbers at this time of year tend to be volatile because claims slow during the holidays.

Separate data from the Federal Reserve showed U.S. households paid down a record $7.9 billion in consumer debt in November, the third month in the past four in which they paid off more debt than they took on. See Economic Report on consumer credit.

The recession, job losses that could be the worst in about 60 years and the worst consumer confidence on record joined forces to pummel retailers in December, hurting even industry leader Wal-Mart Stores Inc.
WMT, -1.58%Read the retail roundup.

On Wednesday, the ADP Employment Services report said private companies cut 693,000 jobs in December, almost 50% more than some economists had predicted. See Economic Report on ADP jobs data.

The jobs reports came ahead of Friday's nonfarm payrolls report for December from the Labor Department. Some analysts expect that report to show an increase in unemployment to 7.1% from 6.7% in November. See Economic Preview on nonfarm payroll report.

Pressure on ECB

Earlier Thursday, the European single currency dropped toward the day's lows after data showed a sharper-than-expected drop in economic sentiment across the region last month.

The European Commission on Thursday said its economic sentiment indicator for the euro zone fell 7.8 points to 67.1 in December, the lowest reading since the index was launched in 1985.

Consensus expectations were for a decline to 71.3 from 74.9 in November. The commission's industrial and consumer confidence indicators also fell to their lowest levels since 1985, while the services confidence indicator tumbled to its lowest level since the survey was introduced 12 years ago, the commission said.

A stream of deteriorating economic data and falling inflation indicators will increase pressure on the European Central Bank to cut rates when it meets next Thursday, economists said.

That's despite remarks by ECB President Jean-Claude Trichet and other officials that have indicated the central bank would prefer to pause after cuttings its key lending rate by 175 basis points, or 1.75 percentage points, to 2.5% since October.

"Clearly, after today's figures, chances for a 50 basis point move are rising," said Aurelio Maccario, chief euro zone economist at UniCredit MIB in Milan.

"Considering that Trichet himself has been claiming that a pause would have been wise in order to see how recent cuts feed through the real economy, we remain inclined to think that the consensus within the council will coagulate on a 25 basis point move," Maccario said.

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